Wei Jiang

The Real Effects of Financial Markets: The Impact of Prices on Takeovers

Download:

Abstract:
This paper provides evidence of the real effects of financial markets. Using mutual fund redemptions as an instrument for price changes, we identify a strong effect of market prices on takeover activity (the "trigger effect"). An inter-quartile decrease in valuation leads to a 7 percentage point increase in acquisition likelihood, relative to a 6% unconditional takeover probability. Instrumentation addresses the fact that prices are endogenous and increase in anticipation of a takeover (the "anticipation effect"). Our results overturn prior literature which found a weak relation between prices and takeovers without instrumentation. They imply that financial markets may impose discipline on managers by triggering takeover threats. More generally, they demonstrate the bi-directional relationship between asset prices and corporate finance — prices both affect and reflect real decisions.